oversight

The Housing Authority of the City of Gary, Indiana Did Not Properly Manage its Section 8 Housing Program and Significant Weaknesses Existed

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                AUDIT REPORT




    HOUSING AUTHORITY OF THE CITY OF GARY
         SECTION 8 HOUSING PROGRAM

                        GARY, IN

The Authority Did Not Properly Manage its Section 8 Housing
       Program and Significant Weaknesses Existed

                      2005-CH-1020

                  SEPTEMBER 29, 2005

                 OFFICE OF AUDIT, REGION V
                     CHICAGO, ILLINOIS
                                                                 Issue Date
                                                                          September 29, 2005
                                                                  Audit Report Number
                                                                              2005-CH-1020




TO:         Paula O. Blunt, General Deputy Assistant Secretary for Public and Indian
              Housing, P
            Thomas Marshall, Director of Public Housing Hub, 5DPH
            Margarita Maisonet, Director of Departmental Enforcement Center, CV


FROM:       Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: The Housing Authority of the City of Gary, Indiana Did Not Properly Manage its
           Section 8 Housing Program and Significant Weaknesses Existed

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Housing Authority of the City of Gary’s (Authority) Section 8
             housing program. The audit was part of the activities in our fiscal year 2005
             annual audit plan. We selected the Authority based upon a risk analysis that
             identified it as having a high risk Section 8 housing program. The objective of the
             audit was to determine whether the Authority managed its Section 8 program in
             accordance with the U.S. Department of Housing and Urban Development’s
             (HUD) requirements.

 What We Found

             Overall, the Section 8 housing program was not operated according to HUD and
             the Authority’s requirements. The Authority’s board of commissioners did not
             act responsibly to ensure federal requirements and the Authority’s own policies
             were followed. The Authority’s executive director did not exercise adequate day-
             to-day control over the operation of the Section 8 housing program.

             The Authority’s Section 8 housing units were in poor physical condition. Our
             inspections noted 57 of 63 units that did not meet HUD’s housing quality
             standards. We also noted significant weaknesses in using administrative fees,
           issuing vouchers without proper documentation, calculating housing assistance
           payments, and abating Section 8 vouchers. In addition, the Authority misused
           Section 8 funds by overpaying per diem, improperly disallowing tenant income,
           and erroneously charging expenses to its Section 8 housing program.

What We Recommend

           We recommend that HUD’s general deputy assistant secretary for public and
           indian housing issue a notice of default to the Authority regarding the
           administration of its Section 8 housing program. We also recommend that the
           director of HUD’s Public Housing Hub, Cleveland Field Office, require the
           Authority to contract out its Section 8 program or transfer control to HUD, and
           ensure the Authority reimburses its program for the inappropriate uses of Section
           8 funds cited in this report.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence issued because of the audit.

Auditee’s Response


           We provided our discussion draft audit report to the Authority’s executive
           director and HUD’s staff during the audit. We held an exit conference with the
           Authority’s executive director on September 20, 2005.

           We asked the Authority’s executive director to provide comments on our
           discussion draft audit report by September 26, 2005. The Authority’s executive
           director provided written comments dated September 26, 2005. The executive
           director agreed to implement corrective action to address our findings. The
           complete text of the written comments, along with our evaluation of those
           comments where needed, can be found in appendix B of this report.




                                            2
                              TABLE OF CONTENTS

Background and Objectives                                                             4

Results of Audit

        Finding 1: Section 8 Program Was Not Operated According to Requirements       5

        Finding 2: Section 8 Units Did Not Meet HUD’s Housing Quality Standards       8

        Finding 3: The Authority Inappropriately Funded $805,585 for HOPE VI         15
                   Development from Section 8 Administrative Fees

        Finding 4: Controls Over Housing Assistance Payments Were Inadequate         18

        Finding 5: The Authority Inappropriately Abated Section 8 Vouchers           21

        Finding 6: Section 8 Employees and the Board of Commissioners Were           22
                   Overpaid Per Diem by $17,080

        Finding 7: The Authority Overpaid $36,001 in Housing Assistance Payments     24
                   By Improperly Disallowing Earned Income

        Finding 8: The Authority Inappropriately Charged Expenses to the Section 8   26
                   Program

Scope and Methodology                                                                28

Internal Controls                                                                    29

Appendixes

   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use               31
   B.   Auditee Comments and OIG’s Evaluation                                        32
   C.   Criteria                                                                     39
   D.   Results of Tenant File Reviews                                               46




                                              3
                      BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Gary (Authority) is a nonprofit governmental entity organized
under the laws of the State of Indiana to provide decent, safe, and sanitary housing for low-income
families under the U.S. Housing Act of 1937. The City of Gary established the Authority in 1938.
A seven-member board of commissioners governs the Authority. The mayor of Gary appoints the
board members to four-year staggered terms. The executive director, appointed by the board of
commissioners, is responsible for coordinating established policy and carrying out the Authority’s
day-to-day operations. As of December 31, 2004, the Authority had 1,286 Section 8 housing units
and 2,182 public housing units.

The Authority was designated as a troubled Section 8 housing program by the U.S. Department of
Housing and Urban Development (HUD) in 2002. HUD executed a memorandum of agreement on
September 28, 2004, with the Authority based upon its troubled designation and Section 8
management assessment scores. The Authority certified a score of 68 in fiscal year 2003 on its
Section 8 management assessment program. HUD performed a Section 8 management assessment
program confirmatory review in September 2004 and changed the Authority’s score to 14.

Our objective was to determine whether the Authority operated its Section 8 housing program
according to HUD’s requirements.




                                                 4
                                 RESULTS OF AUDIT

Finding 1: Section 8 Program Was Not Operated According to
                            Requirements
The Authority’s board of commissioners did not adequately exercise its responsibility to effectively
manage the Authority. The Authority’s executive director did not implement adequate controls to
ensure that Section 8 units were free of health and safety violations. Further, the Authority lacked
adequate controls over its operations. These deficiencies have existed with the Authority’s Section
8 housing program for more than three years. The Authority’s board and its executive director did
not follow HUD’s requirements and/or the Authority’s own policies. As a result, HUD lacked
assurance that more than $8 million in Section 8 funds was effectively used to benefit the
Authority’s Section 8 tenants.


 Prior HUD Reviews


               HUD noted significant weaknesses in the Authority’s Section 8 housing program
               during prior reviews conducted in 2002 and 2004. HUD performed a rental
               integrity monitoring review of the Section 8 program in December 2002. A
               corrective action plan was issued, and a rental integrity monitoring re-review was
               completed in March 2004. The re-review determined that the Authority
               unsatisfactorily implemented the corrective actions addressed in the corrective
               action plan.

               The Authority was designated troubled for fiscal year 2002. Due to the troubled
               status of the Authority, HUD’s Indianapolis Field Office of Public Housing
               conducted a Section 8 Management Assessment Program confirmatory review in
               September 2004. The confirmatory review determined the Authority’s Section 8
               Management Assessment Program score to be a 14, with 60 as a passing score. In
               fiscal year 2003, the Authority gave itself a score of 68.

 Significant Issues Noted during
 Our Audit

               We noted the following significant issues during the audit:

                   •   The Authority’s Section 8 units did not meet HUD’s housing quality
                       standards due to the poor condition of most units inspected. The
                       violations existed because the Authority failed to perform sufficient
                       quality control inspections and failed to exercise proper supervision and
                       oversight of Section 8 unit inspections (see finding 2).




                                                 5
   •   The Authority’s board of commissioners and executive director did not
       ensure that HUD’s requirements regarding the use of administrative fees
       were followed when the Authority used $805,585 in administrative fees to
       fund its HOPE VI development (see finding 3).

   •   The Authority’s board of commissioners and the executive director failed
       to ensure the Authority followed HUD’s requirements or its Section 8
       administrative plan regarding Section 8 tenant files, resulting in missing or
       incomplete files for 65 of 73 files reviewed (see finding 4).

   •   The Authority inappropriately allowed the repayment of $59,348 in
       abatements to landlords. The Authority withheld 100 percent of the
       housing assistance payment for the abated period, but returned 75 percent
       of the rent to the landlord when the property passed inspection. The
       Authority’s management failed to comply with HUD’s requirements and
       its own administrative plan regarding the abatement of housing assistance
       payments (see finding 5).

   •   The Section 8 employees and the board of commissioners for the
       Authority were overpaid per diem by $17,080. The overpayment was due
       to the Authority’s commissioners authorizing higher rates for per diem
       than authorized in the City of Gary’s travel requirements. The
       commissioners did not act prudently considering their responsibilities to
       the governmental unit, its employees, the public at large, and the federal
       government (see finding 6).

   •   The Authority overpaid $36,001 in housing assistance payments by
       inappropriately allowing 14 Section 8 tenants to disregard income as part
       of their housing assistance payment calculations. This occurred because
       the Authority misunderstood and misinterpreted HUD’s approval of its
       HOPE VI relocation plan (see finding 7).

   •   The Authority failed to comply with HUD’s regulations by inappropriately
       charging $20,706 in expenses to the Section 8 housing program. This was
       indicative of the Authority’s failure to act with reason or prudence in
       expensing items to the program (see finding 8).

The deficiencies in the Authority’s Section 8 housing program are significant and
demonstrate a lack of effective management of the program. Additionally, some
problems are longstanding because the Authority’s board of commissioners did
not adequately address them. As a result, we recommend that this program be
contracted out so that more than $8 million in Section 8 program funds can be
used more efficiently and effectively. Both HUD and the Authority have also
determined the Section 8 program should be contracted to a third party. The
Authority began the contracting process by publishing a notice of request for
proposal on July 11, 2005. However, HUD should issue a written notice to the
Authority as permitted by Section 15 of the Section 8 annual contributions


                                 6
          contract that permits HUD to take possession of all or any Authority property,
          rights, or interests in connection with its Section 8 housing program. The notice
          should reserve HUD’s right to protect its interest in case the contracting process is
          not completed.

Recommendations


          We recommend that HUD’s general deputy assistant secretary for public and
          Indian housing

          1A.     Issue a written notice to the Authority as permitted by Section 15 of the
                  Section 8 annual contributions contract that permits HUD to take
                  possession of all or any Authority property, rights, or interests in
                  connection with its Section 8 housing program.

          We recommend that the director of HUD’s Public Housing Hub, Cleveland Field
          Office, require the Authority to

          1B.     Continue contracting proceedings with HUD’s oversight, or transfer
                  control of the Authority’s Section 8 housing program to HUD if the
                  Authority is unsuccessful in contracting out the program. These actions
                  will help ensure that $8,057,519 in Section 8 funds are used in support of
                  housing that meets housing quality standards.

          We also recommend that the director of HUD’s Departmental Enforcement
          Center

          1C. Take administrative action against the Authority’s board of commissioners
              for failing to administer the Authority’s Section 8 program according to
              federal and its own requirements.




                                            7
Finding 2: Section 8 Units Did Not Meet HUD’s Housing Quality
                              Standards
The Authority’s Section 8 units did not meet HUD’s housing quality standards due to the poor
condition of most units inspected. Our inspections found that 57 of 63 Section 8 units did not
meet minimum housing quality standards. The Authority did not perform reinspections of its
Section 8 units in a timely manner. The violations existed because the Authority failed to
exercise proper supervision and oversight of its Section 8 unit inspections. As a result, $78,738
in Section 8 funds was not used efficiently and effectively to provide units that were decent, safe,
and sanitary.



 Units Did Not Meet HUD’s
 Housing Quality Standards

               Of the 63 units we inspected, 57 (90 percent) had 491 housing quality standards
               violations as indicated in the following table.

                                                                  Number of
                               Category of violations             violations
                      Electrical                                      79
                      Security                                        72
                      Windows                                         65
                      Smoke detectors                                 46
                      Interior walls                                  37
                      Range/refrigerator                              35
                      Exterior surface                                19
                      Ceiling                                         19
                      Exterior stairs                                 15
                      Floor                                           15
                      Other potential hazardous features              14
                      Lead-based paint                                11
                      Ventilation                                     10
                      Foundation                                       7
                      Access to unit                                   7
                      Interior stairs                                  6
                      Flush toilet in enclosed room                    6
                      Interior air quality                             4
                      Water heater                                     4
                      Chimney condition                                4
                      Roof                                             4
                      Tub/shower unit                                  4
                      Garbage and debris                               4
                      Plumbing                                         2
                      Space for preparation and storage of food        2
                                           Total                     491



                                                 8
Electrical Violations


                By reviewing the Authority’s own inspection reports, we determined that 11 of
                the 491 deficiencies were identified at the time the Authority conducted its most
                recent inspections. These deficiencies were included in 40 units in which we
                determined that 149 deficiencies existed before the last inspection conducted by
                the Authority.

                Seventy-nine electrical violations were present in 34 of the Authority’s Section 8
                units inspected. The following items are examples of electrical violations listed in
                the table: outlets with open grounds, light fixtures hanging from wires, no cover
                on junction box, ground fault circuit interrupters not tripping, loose wires, and
                receptacles without covers. The following pictures are examples of the electrical
                violations identified in the Section 8 housing units inspected.

3960 Maryland:
Cover on electric panel
is not securely fastened;
panel also has a breaker
missing.




                                                 9
3837 Maryland:
Exposed wires in
basement junction box.




Security Violations

                Seventy-two security violations were present in 38 of the Authority’s Section 8
                units inspected. The following items are examples of security violations listed in
                the table: locks on exterior doors not working, broken door jam, and use of
                unacceptable double-keyed deadbolt locks. The following pictures are examples
                of the security violations identified in the Section 8 housing units inspected.

4940 Carolina Street:
Broken door jam on the
locking side of door with
missing strike plate.




                                                10
    843 Harrison Street:
    Broken door jam and
    loose strike plate.




  Window Violations

                 Sixty-five window-related violations were present in 34 of the Authority’s Section
                 8 housing units inspected. The following items are examples of window-related
                 violations listed in the table: windows not able to open, window locks not
                 working properly, and broken windowpanes. The following pictures are
                 examples of the window-related violations.

1430 West 16th
Avenue:
Broken bedroom glass
pane.




                                                 11
2621 West 61st Place,
unit 31:
Moldy bedroom window.




The Authority Did Not Perform
Reinspections in a Timely
Manner

             The Authority did not perform reinspections of its Section 8 units in a timely
             manner. According to the Authority's administrative plan, if a unit fails due to a
             housing quality standards violation, the owner or tenant is given 30 days before
             the unit is reinspected for nonemergency corrections. If a unit fails at the
             reinspection, abatement is placed on the unit’s housing assistance payment. To
             either continue abatement or cancel a contract on an abated unit, the Authority
             conducts another inspection upon notification by the owner or the tenant that the
             deficiencies were corrected. The abatement is continued until the end of the
             contract if the unit fails the inspections.

             The Authority’s interim Section 8 manager said the reasons for the untimely
             reinspections of failed units were due to the handling of reinspections by the
             previous administration, and a reduced Section 8 staff. Previously, the Authority
             did not perform reinspections at the end of the 30-day period—instead it allowed
             the owner to set the reinspections based on the deficiencies being corrected. The
             owner would inform the Authority if a unit was not ready to be inspected, and the
             Authority lost track of units needing reinspections after the 30-day period. In
             addition to the owner controlling the reinspection date, the Authority’s Section 8
             department experienced a reduction in staff. In September 2004, three Section 8
             employees were discharged, and in November 2004, the Section 8 inspector was
             reassigned to another department at the Authority. The Authority only had two
             inspectors to cover an estimated 1,200 Section 8 units.




                                              12
            We reviewed 975 inspections performed for 589 Section 8 units by the
            Authority’s inspectors in the previous six months (October 1, 2004, through April
            1, 2005) to determine the timeliness of reinspections. According to the
            Authority’s administrative plan, there should not be more than one reinspection;
            however, the Authority conducted up to three reinspections on units. The
            following table shows the range and average days of reinspections performed late.

                                                                             Performed Late
                                            Total      Performed in a             range average
             Types of inspection         inspections   timely manner    count    (days) (days)
       Reinspection                          207              50          91      31-110    49
       Second reinspection                   111              34          36      31- 79   46
       Third reinspection                     68              20          19      31- 88    48
       Last inspection – April 1, 2004       155              73          82      30-175    59
                    Totals                   541            177          228
       Percent of total inspections      100 percent     33 percent            42 percent

            We determined that 33 percent of the reinspections reviewed were conducted
            within the appropriate timeframe. The majority (42 percent) of the 541
            reinspections was not performed in a timely manner—ranging from 30 to 175
            days late—and we could not determine the timeliness of the remaining 25 percent
            of the reinspections reviewed based upon the Authority’s files.

Causes for Deficiencies

            The violations existed because the Authority failed to exercise proper supervision
            and oversight of Section 8 unit inspections. The Authority’s executive director
            terminated a former Section 8 manager and reassigned another manager due to
            performance-related problems. The current interim Section 8 manager was
            previously a property manager for low-income housing, and is inexperienced in
            managing Section 8 programs. She is managing the Section 8 program until the
            program is contracted out, and began performing quality control reviews of
            inspections in December 2004 without adequate training or experience in this
            area. Before that, the former Section 8 manager did not properly annotate the
            inspections so it was difficult to distinguish quality control inspections from
            regular inspections. The executive director agreed that proper supervision would
            have helped to correct the inadequate inspections within the Section 8 program.

HUD Funds Were Not Used
Properly


            The Authority’s executive director was aware that the Section 8 program had
            problems and attempted to correct the problems by replacing management of the
            program. However, the board of commissioners removed her ability to hire and
            terminate employees without the board’s permission, resulting in significant
            delays in attempts to make personnel changes.


                                               13
          The Authority did not properly use Section 8 funds when it failed to enforce
          compliance with HUD’s housing quality standards. In accordance with 24 CFR
          [Code of Federal Regulations] 982.152(d), HUD is permitted to reduce or offset
          any Section 8 administrative fees paid to the Authority if it fails to enforce HUD’s
          housing quality standards. The Authority disbursed $71,891 in Section 8 housing
          assistance payments for 40 Section 8 units that materially failed to meet HUD’s
          housing quality standards. In addition, the Authority earned $6,847 in Section 8
          administrative fees for these 40 units.

Recommendations

          We recommend that the director of HUD’s Public Housing Hub, Cleveland Field
          Office, require the Authority to

          2A.     Notify all landlords and tenants of units that failed housing quality
                  standards inspections and provide a copy of the inspection report and a
                  written notice when violations should be corrected.

          2B.     Conduct followup housing quality standards’ inspections on housing units
                  that failed inspection to determine whether violations still exist, and abate
                  housing assistance payments to landlords.

          2C.     Implement a quality control plan—if the Authority retains oversight
                  control of the Section 8 program—to ensure that all units meet housing
                  quality standards within the next 12 months to prevent Section 8 funds
                  from being spent on units that are in noncompliance with the standards.

          2D.     Reimburse its Section 8 housing program $78,738 from nonfederal funds
                  ($71,891 for housing assistance payments and $6,847 in associated
                  administrative fees) for Section 8 units that materially failed the
                  inspections cited in this finding.




                                           14
Finding 3: The Authority Inappropriately Funded $805,585 for HOPE
          VI Development from Section 8 Administrative Fees
The Authority paid HOPE VI expenses from Section 8 administrative fees instead of using
administrative fee reserves and did not accurately account for the funds used. The Authority
failed to follow the Authority’s board of commissioners’ resolution that approved the use of
administrative fee reserves to assist the HOPE VI program because the Authority lacked
sufficient controls over these funds. As a result, $805,585 in Section 8 program funds was
improperly used.


 $805,584 in HOPE VI Expenses
 Were Paid with Administrative
 Fees
              The Authority paid $805,585 in HOPE VI expenses from Section 8 administrative
              fees instead of using administrative fee reserves. We reviewed 100 percent of the
              Section 8 funds used for the HOPE VI program by reviewing general ledgers,
              vouchers, and canceled checks. The funds were used to pay expenses for
              McCormack, Baron & Associates of $511,381, land acquisitions of $187,987, and
              other HOPE VI program expenses of $106,217, for a total of $805,585. The
              following table summarizes the inappropriate expenses charged to the Authority’s
              Section 8 administrative fees.

                       Inappropriately used administrative fee funds
                           April 2002- April 2003 - April 2004 -      Total
         Funding for:      March 2003 March 2004 April 2005          expense
         McCormack,
         Baron &
         Associates fees
         and expenses          $65,294        $97,890     $348,197 $511,381
         Land
         acquisitions                 0       177,987        10,000 187,987
         Other expenses               0        17,800        88,417 106,217
              Totals           $65,294       $293,677     $446,614 $805,585

              The Authority used Section 8 administrative fees to fund and acquire land for the
              HOPE VI program in violation of 24 CFR [Code of Federal Regulations]
              982.152. This part states that administrative fees may only be used to cover costs
              to perform administrative responsibilities for the Section 8 program.

 The Authority Did Not
 Accurately Account for Funds
 Used
              The Authority did not accurately account for the funds used for HOPE VI and
              violated the board of commissioners’ resolution by not funding a separate

                                               15
             account. The Authority expensed the HOPE VI expenses to the Section 8
             vouchers section of the general ledger. The funds were charged to the Authority’s
             Section 8 voucher sundry account, HOPE VI assistance account, employer paid
             benefit account, earned operating subsidy current year account, annual
             contribution earned Section 8 account, and site acquisition HOPE VI account.
             We requested complete records of the administrative fee reserves and account
             balances from April 2001 through March 2005, but the Authority was unable to
             provide the requested information. The Authority’s comptroller confirmed that
             the Authority was using administrative fees or voucher funds to pay for the HOPE
             VI development and land acquisition. The financial statements supported the
             comptroller’s statement since no administrative fee reserves were identified in the
             Authority’s 2003 annual audited financial statements.

The Authority Failed to Follow
the Board of Commissioners’
Resolution on Using Section 8
Administrative Fee Reserves


             The Authority failed to follow the Authority’s board of commissioners’ resolution
             that approved the use of administrative fee reserves to assist the HOPE VI
             program in accordance with 24 CFR [Code of Federal Regulations] 982.155. The
             Authority lacked sufficient controls over Section 8 administrative fees and
             administrative fee reserves. On September 12, 2002, the board authorized
             $350,000 to be placed in an account in which the funds can be used to fund
             activities in furtherance of the HOPE VI project that do not have any other
             funding source. On March 13, 2003, the board also authorized the executive
             director to enter into contracts with the City of Gary, Indiana for the purpose of
             acquiring land for the offsite rental phase of the HOPE VI program, using up to
             $250,000 in Section 8 administrative fee reserves. Through reviews of financial
             records, we determined that the Authority did not establish the administrative fee
             reserve account per the board’s resolution.


Conclusion

             We determined that the $805,585 in administrative fees was disbursed over a 37-
             month period, averaging $21,773 per month. Using this monthly total, we
             estimate an annual benefit of $261,276 if the Authority strengthens its controls
             over the use of administrative fees.

Recommendations

             We recommend that the director of HUD’s Public Housing Hub, Cleveland Field
             Office, require the Authority to




                                             16
3A.   Reimburse its Section 8 administrative fees $805,585 from nonfederal
      funds for inappropriately funding HOPE VI expenses.

3B.   Implement procedures and controls to ensure that $261,276 in estimated
      Section 8 administrative fees is used appropriately.




                              17
Finding 4: Controls over Housing Assistance Payments Were
                             Inadequate
The Authority failed to comply with HUD’s regulations and its Section 8 administrative plan
regarding housing assistance payments. The Authority lacked documentation to support issuing
housing assistance payment vouchers to Section 8 landlords and incorrectly calculated housing
assistance payments. In addition, the Authority inappropriately executed loan contracts to
Family Self-Sufficiency program participants. The Authority also needed to establish an account
to deposit $17,901 in escrow credits for the Family Self-Sufficiency program. Weaknesses
occurred due to an absence of procedures and controls to ensure HUD’s regulations and the
Authority’s administrative plan were appropriately followed. As a result, the Authority lacked
documentation to support $738,708 in housing assistance payments made and made net
overpayments of $16,954.



 The Authority Lacked Proper
 Documentation to Support
 Issuing Housing Assistance
 Payments

               The Authority lacked documentation to support issuing housing assistance
               payment vouchers totaling $738,708. Of the 73 tenant files reviewed, 65 files
               had the following missing or incomplete documents:

                   •   18 were missing birth certificates,
                   •   18 were missing or had incomplete signed certifications of citizenship,
                   •   9 were missing proof of Social Security numbers,
                   •   38 were missing signed housing assistance payment contracts and lease
                       agreements,
                   •   10 were missing the original application,
                   •   30 were missing disclosures of information on lead-based paint, and
                   •   53 had incomplete or missing rent reasonableness forms.

               Of the total files reviewed, 89 percent contained missing or incomplete
               documentation. Table I in appendix D of this report details our results. In
               addition, the Authority used $74,259 in administrative fees to service the
               inappropriate housing assistance payments for the 65 vouchers. Therefore, HUD
               lacked assurance the administrative fees were appropriately earned by the
               Authority.

               The Authority’s executive director said the Section 8 employees were not
               capable of adequately performing in their assigned positions, despite receiving
               Section 8 training. In addition, the board of commissioners maintained excessive
               control over hiring and firing decisions which hampered the executive director’s
               day-to-day decisions regarding staffing.


                                               18
The Authority Incorrectly
Calculated Housing Assistance
Payments

            The Authority incorrectly calculated housing assistance payments causing
            overpayments of $23,138 and underpayments of $6,184 from January 2003
            through December 2004 (see Table II in appendix D of this report). To
            determine whether the Authority correctly calculated the housing assistance
            payments, we reviewed annual certifications conducted between January 2003
            and December 2004 from a random sample of 73 Section 8 tenant files. The
            Authority incorrectly calculated housing assistance payments in 68 of the 73
            tenant files (93 percent) reviewed for one or both of the annual certifications that
            took place in 2003 and 2004. Four of the files’ housing assistance payments
            could not be determined due to missing or incomplete documentation. The
            Authority correctly calculated housing assistance payments for one tenant file as
            it was found to have all of the required documentation. Overall, errors occurred
            because the Authority did not use the appropriate annual income figures and/or
            utility allowances.

            The Authority made errors in 32 tenants’ annual certifications for one or both
            years when determining annual income. Seven more tenants’ annual income—
            for one or both years—could not be determined because documents were missing
            or incomplete for their files. The Authority also used incorrect utility allowances
            for 65 tenants’ annual certifications for one or both years. There were three more
            tenants whose utility allowances could not be determined for one or both years
            because documents were missing or incomplete for their files. Over and under
            payments of housing assistance payments from January 2003 until December
            2004 occurred because of a lack of tenant file reviews by the Authority’s Section
            8 staff. As a result, HUD and the Authority lacked assurance that housing
            assistance payments were accurate.

The Authority Failed to
Appropriately Manage Its
Family Self-Sufficiency Program

            The Authority inappropriately executed loan contracts to Family Self-Sufficiency
            program participants and did not establish an account to deposit escrow credits.
            HUD regulations regarding the Family Self-Sufficiency program allow partial
            disbursements to participants who have shown progress in the program.
            However, the program coordinator developed, instituted, and approved loan
            contracts with program participants that were inappropriate. We notified the
            Authority of this and it converted the loans to program disbursements. To be
            eligible, the disbursements must be used for the participants to meet their goals.
            The requests for two loans totaling $1,307 were not in support of the
            participants’ goals. One loan for $807 was for unpaid utilities to the Northern


                                            19
          Indiana Public Service Company, and no reason for the other loan for $500 was
          provided.

          The Authority did not establish a separate HUD-approved investment account for
          the deposit of the Family Self-Sufficiency program escrow account credits. The
          escrow credits totaled $17,901 as of July 2005. The Family Self-Sufficiency
          program coordinator said he notifies the Authority’s accounting department twice
          a year of changes and updates concerning escrow accounts. The accounting
          department was unaware of the requirement due to recent personnel changes in
          the department. As a result of the Authority’s failure to properly establish this
          account, $17,901 in escrow funds was not invested, and interest was not earned
          on the escrow funds.


Recommendations

          We recommend that the director of HUD’s Public Housing Hub, Cleveland Field
          Office, require the Authority to

          4A.     Provide support or reimburse its Section 8 program $812,967 ($738,708 in
                  housing assistance payments plus $74,259 in related administrative fees)
                  from nonfederal funds for unsupported housing assistance payments and
                  unearned administrative fees related to the 65 tenants cited in this finding.

          4B.     Implement procedures and controls to ensure all required documentation is
                  maintained in the Authority’s current tenant files in support of housing
                  assistance payments made and ensure calculations are correct.

          4C.     Reimburse its Section 8 program $23,138 for the overpayment of housing
                  assistance payments cited in this finding from nonfederal funds.

          4D.     Reimburse the appropriate tenants $6,184 for the underpayment of
                  housing assistance payments from Section 8 housing funds cited in this
                  finding.

          4E.     Provide support or reimburse its Family Self Sufficiency program $1,307
                  from nonfederal funds.

          4F.     Establish a separate federally insured interest-bearing investment account
                  approved by HUD, and allocate the $17,901 in escrow funds appropriately
                  among the participants.

          4G.     Implement procedures and controls to assure that its Family Self-
                  Sufficiency program is operated according to HUD’s regulations.




                                           20
Finding 5: The Authority Inappropriately Abated Section 8 Vouchers
The Authority inappropriately allowed the repayment of abated housing assistance payments to
landlords. It withheld housing assistance payments for the abatement period, but returned 75
percent of the rents to landlords once units passed inspection. The Authority lacked procedures
and controls to ensure rents are abated in accordance with HUD’s requirements and the
Authority’s administrative plan. As a result, the Authority inappropriately returned $59,348 in
housing assistance payments to landlords who did not maintain their housing units in decent,
safe, and sanitary condition.



 The Authority Inappropriately
 Returned Housing Assistance
 Payments to Landlords


              The Authority improperly paid $59,348 in housing assistance payments to
              landlords once units passed inspection. These funds were inappropriately
              returned to the landlords in violation of HUD and the Authority’s requirements.
              According to the interim Section 8 manager, the Authority had always done the
              abatements by returning 75 percent of the housing assistance payments to
              landlords once units passed inspection. The manager was unaware that this was
              not in accordance with HUD’s regulations and the Authority’s administrative
              plan.

              We requested a report showing the total amount of funds returned to landlords
              after failing an inspection and not completing corrections within 30 days, to
              identify the amount improperly returned to landlords. We identified $59,348 in
              Section 8 funds that were not used according to HUD’s regulations and the
              Authority’s Section 8 administrative plan.

 Recommendations

              We recommend that the director of HUD’s Public Housing Hub, Cleveland Field
              Office, require the Authority to

              5A.     Reimburse its Section 8 housing program $59,348 from nonfederal funds
                      for inappropriately returning abated housing assistance payments to
                      landlords.

               5B.    Implement procedures and controls to ensure that abatements of housing
                      assistance payments are done according to its approved administrative
                      plan and HUD’s requirements.




                                               21
Finding 6: Section 8 Employees and the Board of Commissioners Were
                    Overpaid Per Diem by $17,080
Section 8 employees and the board of commissioners were overpaid per diem because the
Authority’s commissioners did not follow Office of Management and Budget Circular A-87
guidelines on reasonable costs, or act prudently when they set unreasonable per diem rates for
the Authority. The commissioners authorized higher rates of per diem than were authorized in
the City of Gary’s travel regulations. As a result, available funding for the Authority was
unnecessarily reduced by $17,080.


 The Board of Commissioners
 Set Unreasonable Per Diem
 Rates

              The Authority’s board of commissioners did not follow city, state, or federal
              travel regulations or act prudently when it set unreasonable per diem rates for the
              Authority. The board initially raised the per diem rate to $75 per day for
              everyone, and then raised the rate applicable to board members to $100 per day.
              The board lowered its rate back to $75 per day when tenants requested the same
              rate the board was getting. The Authority’s chairman of the board of
              commissioners said the reason the board raised its per diem rate for meals was
              because the existing rate was not sufficient to cover what the board needed while
              in a travel status.

              Housing authorities are local government employees. Therefore, housing
              authority employees are subject to the regulations implemented by the City of
              Gary. In addition, housing authorities are subject to Office of Management and
              Budget Circular A-87, “Cost Principles for State, Local, and Indian Tribal
              Governments.” Therefore, per diem rates of a housing authority must meet
              reasonableness standards set out in Office of Management and Budget guidance.

              In addition, the board of commissioners must consider its responsibilities to the
              governmental unit, its employees, the public at large, and the federal government.
              The per diem rate of $75 established by the board of commissioners significantly
              deviated from established practices of the City of Gary. The per diem rate for
              City employees was $40 per day. As a result, the per diem rates established by
              the board were not reasonable, and unnecessarily reduced Section 8 program
              funds.

 Recommendations

              We recommend that the director of HUD’s Public Housing Hub, Cleveland Field
              Office, require the Authority to




                                               22
6A.   Reimburse its Section 8 program $17,080 from nonfederal funds for the
      overpayment of per diem.

6B.   Implement procedures and controls to ensure travel reimbursements are
      consistent with local requirements and Office of Management and Budget
      Circular A-87 guidelines.




                             23
Finding 7: The Authority Overpaid $36,001 in Housing Assistance
         Payments By Improperly Disallowing Earned Income
The Authority improperly disallowed earned income used in calculating housing assistance
payments to be received by Section 8 tenants. The Authority’s procedures were not consistent
with HUD’s provision in the Authority’s HOPE VI relocation plan, since the disallowance only
applied to low-rent housing tenants. As a result, the Authority overpaid $36,001 in housing
assistance payments to unqualified Section 8 tenants.



 Tenants’ Income Was
 Improperly Disallowed from
 Housing Assistance
 Calculations

              The Authority improperly disallowed income for 14 Section 8 tenants resulting in
              overpayments of housing assistance payments. The HOPE VI program allows
              tenants forced to move from low-rent public housing to have a portion of their
              earned income disregarded. However, the 14 tenants were not low-rent public
              housing tenants. The improper disallowance of earned income resulted in
              $36,001 in overpayments of housing assistance payments. The amount of
              housing assistance payments overpaid by the Authority in 2003 and/or 2004 is
              listed in the following table.

                                            Actual housing   Amount refunded
                        OIG housing           assistance     by the Authority
                     assistance payment        payments       due to earned     Amount of housing
           Tenant    recalculations with    without earned        income           assistance
           number      earned income            income         disallowance     payments overpaid
            15270           $6,867              $12,075             N/A              $5,208
            11529                0                4,062             N/A                4,062
            12169            5,052                6,760             N/A                1,708
            14550            2,688                7,035             N/A                4,347
            10002           14,264               14,905             N/A                  641
            11945            2,970                4,995             N/A                2,025
             3085            4,554                5,091             N/A                  537
             3826            2,964                6,300             N/A                3,336
             9078             N/A                11,295           $3,498               3,498
            15229            9,519               12,351             N/A                2,832
            14465            3,195                4,998             N/A                1,803
             9292            3,984                6,600             N/A                2,616
            10577            5,280                6,472             N/A                1,192
            10764            4,404                6,600             N/A                2,196
                                           Total                                    $36,001




                                                 24
The Authority’s Procedures Were
Inconsistent with HUD’s
Guidelines

           The Authority permitted the earned income disallowance for Section 8 tenants
           because of HUD’s approval of the Authority’s HOPE VI relocation plan.
           However, according to HUD’s HOPE VI coordinator, the Authority
           misinterpreted HUD’s approval to include Section 8 tenants as qualified tenants
           for earned income disallowance. Title 24 CFR [Code of Federal Regulations],
           960 defines a qualified family for receiving earned income disallowance as a
           family residing in public housing. Therefore, the Section 8 tenants did not qualify
           for the earned income disallowance, resulting in the Authority overpaying
           $36,001 in housing assistance payments.

Recommendations

           We recommend that the director of HUD’s Public Housing Hub, Cleveland Field
           Office, require the Authority to

           7A.    Reimburse its Section 8 program $36,001 from nonfederal funds for
                  improperly assigning earned income disallowance adjustments for the 14
                  tenants cited in this finding.

           7B.    Implement procedures and controls to follow HUD’s guidance regarding
                  the proper use of earned income disallowance.




                                           25
Finding 8: The Authority Inappropriately Charged Expenses to The
                          Section 8 Program
The Authority failed to comply with HUD’s regulations by inappropriately charging expenses to
the Section 8 program. It failed to act with prudence because procedures and controls were
lacking to ensure HUD’s regulations and the principles of Office of Management and Budget
Circular A-87 were followed. As a result, $20,705 was inappropriately charged to the Section 8
program and reduced funds available to assist low and very low-income families and individuals.



 The Authority Did Not Follow
 HUD’s Regulations and Office
 of Management and Budget
 Circular A-87

              The Authority failed to follow HUD’s regulations and Office of Management and
              Budget guidance in expensing items to the Section 8 program. The Authority’s
              Section 8 program administrative fees were charged for HOPE VI expenses,
              property taxes, food, and other expenses that did not benefit the Section 8
              program. The expenses were not allowable costs for administrative fees in
              accordance with 24 CFR [Code of Federal Regulations], 982.152. In addition, the
              Authority failed to follow Office of Management and Budget Circular A-87
              regarding reasonable cost, and the cost was not of a type generally recognized as
              ordinary and necessary for the performance of the Section 8 program. The
              following table lists the inappropriate expenses.

                 Voucher number          Description         Inappropriate amount
                      85678       Program manager services                  $6,111
                      86903       Program manager services                   3,327
                      83295       Rent for HOPE VI office                       87
                      83174       Program manager services                   4,880
                      90369       Property taxes                             1,412
                      90370       Property taxes                               683
                      84288       Elevator repairs                           1,687
                      80521       Executive session lunch                       12
                      77114       Employee picnic                            1,125
                      73621       Weedeater repair                               3
                      73622       Chainsaw repair                                2
                      73623       Chainsaw repair                                2
                      73624       Chainsaw repair                                2
                      73523       Weedeater repair                               3
                      76099       Catered Christmas lunch                    1,369
                                  Total:                                   $20,705

              The inappropriate expenses charged to the Authority’s Section 8 program
              included HOPE VI program manager services, rent for the HOPE VI office,
              property taxes for two properties, elevator repairs, lunch reimbursement, an


                                              26
          employee picnic, a catered staff Christmas party, and chainsaw and weed eater
          repairs.

          The Authority’s management failed to act reasonably and with prudence in terms
          of expensing items to the Section 8 program. This occurred because the Authority
          lacked procedures and controls to ensure HUD’s regulations and the principles of
          Office of Management and Budget Circular A-87 were followed. As a result,
          available funding for the Section 8 program was inappropriately reduced.


Recommendations

          We recommend that the director of HUD’s Public Housing Hub, Cleveland Field
          Office, require the Authority to

          8A.     Reimburse its Section 8 program $20,705 from nonfederal funds for the
                  inappropriate expenses charged to its Section 8 program.

          8B.     Implement procedures and controls to ensure that charges to the Section 8
                  program are expensed appropriately according to HUD’s regulations and
                  Office of Management and Budget Circular A-87.




                                          27
                         SCOPE AND METHODOLOGY

To achieve our audit objectives, we reviewed:

               •   Applicable laws, regulations, and HUD program requirements at 24 CFR [Code
                   of Federal Regulations] 5, 35, 960, 982, and 984; HUD Public and Indian
                   Housing Notice 2004-7; Office of Management and Budget Circular A-87; and
                   the Authority’s Section 8 administrative plan (revised July 29, 1999);

               •   The Authority’s accounting records, annual audited financial statements for 2002
                   and 2003, general ledgers, bank statements and cancelled checks, tenant files,
                   policies and procedures, board meeting minutes for 2003 and 2004,
                   organizational chart, and its Section 8 annual contributions contract; and

               •   HUD’s files for the Authority.

We also interviewed the Authority’s employees, HUD staff, and Section 8 tenants.

We performed our onsite audit work between January and June 2005 at the Authority’s office
located at 578 Broadway, Gary, Indiana. The audit covered the period from January 1, 2003,
through December 31, 2004, but was expanded when necessary to include other periods.

We statistically selected 63 of the Authority’s Section 8 units to inspect. We selected the units
using the U.S. Army Audit Agency’s Statistical Sampling System, Version 6.3 software, from
the Authority’s 653 Section 8 housing units that were inspected by the Authority between
November 24, 2004, and May 24, 2005. The 63 units were selected to determine whether the
Authority properly ensured its Section 8 units met HUD’s housing quality standards.

We selected a statistical sample for the tenant file reviews from the Authority’s total Section 8
vouchers as of December 31, 2004. We used the U.S. Army Audit Agency’s Statistical
Sampling System, Version 6.3 software, to determine the sample size. There were 1,286 Section
8 units as of December 31, 2004. Using a confidence level of 90, a 50 percent error rate, and a
sampling precision of 10 percent produced a sample size of 65 tenant files. A random numbers
listing was created for selection of the 65 tenant files. The tenant file master list was created
using audit command language and assigned line numbers for the random selection. We used 73
tenant files for review—63 tenant files from the review random sample and 10 tenant files from
our survey sample.

We performed our audit in accordance with generally accepted government auditing standards.




                                                28
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls

              We determined the following internal controls were relevant to our audit objectives:

              •       Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls identified above.

              It is a significant weakness if internal controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet an organization's objectives.




                                               29
Significant Weaknesses

           Based on our review, we believe the following conditions at the Authority are
           significant weaknesses:

           •   The Authority did not operate its Section 8 housing program according to
               program requirements (see finding 1),

           •   The Authority failed to exercise proper supervision and oversight of its
               Section 8 unit inspections (see finding 2),

           •   The Authority lacked sufficient controls on the proper use of Section 8 funds
               (see finding 3),

           •   The Authority lacked sufficient procedures and controls to ensure compliance
               with HUD’s regulations and the Authority’s administrative plan (see findings
               4, 5, and 7), and

           •   Controls were lacking to ensure HUD’s regulations and the principles of
               Office of Management and Budget Circular A-87 were followed (see findings
               6 and 8).




                                            30
                                    APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

       Recommendation                                                  Funds to be put
           number                  Ineligible 1/   Unsupported 2/       to better use 3/
              1B                                                            $8,057,519
              2D                      $ 78,738
              3A                       805,585
              3B                                                               261,276
              4A                                          $812,967
              4C                        23,138
              4D                         6,184
              4E                                              1,307
              5A                        59,348
              6A                        17,080
              7A                        36,001
              8A                        20,705
             Totals                 $1,046,779            $814,274          $8,318,795


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     polices or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. The costs are not
     supported by adequate documentation or there is a need for a legal or administrative
     determination on the eligibility of the cost. Unsupported costs require a future decision
     by HUD program officials. This decision, in addition to obtaining supporting
     documentation, might involve a legal interpretation or clarification of departmental
     policies and procedures.

3/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     OIG recommendation is implemented resulting in reduced expenditures at a later time for
     the activities in question. This includes costs not incurred, deobligation of funds,
     withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures,
     loans and guarantees not made, and other savings.




                                              31
Appendix B

         AUDITEE COMMENTS AND OIG EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         32
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         33
Ref to OIG Evaluation   Auditee Comments




                         34
Ref to OIG Evaluation   Auditee Comments




Comment 2




                         35
Ref to OIG Evaluation   Auditee Comments




                         36
Ref to OIG Evaluation   Auditee Comments




                         37
                    OIG Evaluation of Auditee Comments

Comment 1   The Authority disagreed with our recommendation that HUD issue a letter of
            default. The Authority states it has shown initiative and intent to improve its
            operations of the Section 8 program and a default letter could deter contractors
            interested in accepting responsibility for managing and operating the
            Authority’s Section 8 program. Our position is that the default letter will
            provide further assurances that HUD’s interests is protected in the event a
            contractor is not selected or able to effectively manage and operate the
            program.

Comment 2   The Authority’s response directed us to its operating reserve account, but did
            not identify the amount of administrative fee reserves that were included in
            this account, or if the Authority had administrative fee reserves available to
            use. The Authority’s documentation and its comptroller did not support the
            existence of any administrative fee reserves maintained by the Authority.




                                       38
Appendix C
                                         CRITERIA

Finding 1
Section 6 of the Section 8 annual contributions contract mandates that HUD may reduce the
amount payable by HUD if it determines that the Authority has failed to comply with any
obligations under the contract. HUD may reduce to an amount determined by HUD the amount
of the HUD payment for any funding increment. Also Section 15 “Default by a Housing
Authority,” states that upon written notice to the housing authority, HUD may take possession of
any or all housing authority property, rights or interest in connection with a program, including
funds held by a depositary, program receipts, and rights or interests under a contract for housing
assistance payments with an owner, if HUD determines that the housing authority has failed to
comply with any obligations under the consolidated annual contributions contract or the housing
authority has made any misrepresentation to HUD of any material fact.

Finding 2
Federal regulations at 24 CFR [Code of Federal Regulations] 982.401, “Housing Quality
Standards,” requires that all Section 8 program housing must meet the housing quality standards
performance requirements both at commencement of assisted occupancy and throughout the
tenancy.

The Authority’s administration plan, Section 12.2, “Owner and Family Responsibility,” states
the Authority will not make any housing assistance payments for a dwelling unit that fails to
meet housing quality standards, unless the owner corrects the defect within the period specified
by the Authority, and the Authority verifies the correction. If a defect is life threatening, the
owner must correct the defect within 24 hours. For other defects, the owner must correct the
defect within 21 days.

Section 12.5, “Timeframes and Corrections of Housing Quality Standards Failed Items,” states if
the owner does not correct the housing quality standards failed items after proper notification has
been given, the Authority will abate payment and terminate the contract in accordance with the
administration plan.

Section 12.7, “Abatement,” states when a unit fails to meet housing quality standards and the
owner has been given an opportunity to correct the deficiencies but has failed to do so within the
required timeframe, the rent for the dwelling will be abated. The initial abatement period will
not exceed 7 days. If the corrections are not made within the 7-day timeframe, the abatement
will continue until the housing assistance payments contract is terminated. When the
deficiencies are corrected, the Authority will end the abatement the day the unit passes
inspection. Rent will resume the next day and be paid on the first day of the following month.




                                                39
Finding 3
Federal regulations 24 CFR [Code of Federal Regulations] 982.155, “Administrative Fee
Reserve,” mandate that the housing authority must maintain an administrative fee reserve
(formerly ‘operating reserve’) for the program. The Authority must credit to the administrative
fee reserve the total of the amount by which program administrative fees paid by HUD exceed
the Authority’s program administrative expenses for the fiscal year, plus interest earned on the
administrative fee reserve. The Authority must use funds in the administrative fee reserve to pay
program administrative expenses in excess of administrative fees paid by HUD for an
Authority’s fiscal year. If funds in the administrative fee reserve are not needed to cover
administrative expenses, the Authority may use these funds for other housing purposes permitted
by state and local law. The Authority’s board of commissioners or other authorized officials
must establish the maximum amount that may be charged against the administrative fee reserve
without specific approval. If the Authority has not adequately administered any Section 8
program, HUD may prohibit use of funds in the administrative fee reserve, and may direct the
Authority to use funds in the reserve to improve administration of the program, or to reimburse
ineligible expenses.

HUD may also reduce or offset any administrative fee to the Authority, in the amount
determined by HUD, if the Authority fails to perform administrative responsibilities correctly or
adequately under the program (for example, the Authority failed to enforce housing quality
standards requirements).

Office of Management and Budget Circular A-87, attachment A, requires principles to be
established to assure that federal awards bear their fair share of costs, requires all costs to be
necessary and reasonable for proper and efficient performance and administration of federal
awards, and requires all costs to be adequately documented.

Public and Indian Housing Notice, 2004-7, issued April 22, 2004, states that any administrative
fees from fiscal year 2004 funding that are moved into the administrative fee reserve account at
year end may not be used for other housing purposes permitted by state and local law and must
only be used for the provision of Section 8 rental assistance, including related development
activity.

Finding 4
Federal regulations 24 CFR [Code of Federal Regulations] 5.216, “Disclosure and Verification
of Social Security and Employer Identification Numbers,” require that each assistance applicant
must submit the following information to the processing entity when the assistant applicant's
eligibility under the program involved is being determined.

   •   A complete and accurate Social Security number assigned to the assistance applicant and
       to each member of the assistant applicant’s household who is at least six years of age; or

   •   If the assistance applicant or any member of the assistance applicant's household who is
       at least six years of age has not been assigned a Social Security number, a certification
       executed by the individual involved.


                                                  40
Federal regulations 24 CFR [Code of Federal Regulations] 5.508, “Submission of Evidence of
Citizenship or Eligible Immigration Status,” require evidence of citizenship or eligible
immigration status for each family member, regardless of age. For U.S. citizens or U.S.
nationals, the evidence consists of a signed declaration of U.S. citizenship or U.S. nationality.

Federal regulations 24 CFR [Code of Federal Regulations] 35.92, “Lead Based Paint
Certification and Acknowledgement of Disclosure,” require that each contract to lease target
housing shall include, as an attachment or within the contract, a lead warning statement with the
following language: “a statement by the lessor disclosing the presence of known lead-based
paint and/or lead-based paint hazards in the target housing being leased or indicating no
knowledge of the presence of lead-based paint and/or lead-based paint hazards, and a list of any
records or reports available to the lessor pertaining to lead-based paint and/or lead-based paint
hazards in the housing that have been provided to the lessee.”

Federal regulations 24 CFR [Code of Federal Regulations] 982.54, “Administrative Plan,”
require the Authority to adopt a written administration plan that establishes local policies for
administration of the program in accordance with HUD requirements. The Authority’s board of
commissioners or other authorized officials must formally adopt the administration plan and any
revisions of the plan. The Authority must administer the program in accordance with its
administrative plan.

Federal regulations 24 CFR [Code of Federal Regulations] 982.158, “Program Accounts and
Records,” require the Authority to maintain complete and accurate accounts and other records for
the program in accordance with HUD requirements in a manner that permits a speedy and
effective audit. The Authority must prepare a unit inspection report. During the term of each
assisted lease, and for at least three years thereafter, the Housing Authority must keep

   1. A copy of the executed lease,
   2. The housing assistance payments contract, and
   3. The application from the family.

The Authority must keep the following records for at least three years:

   1. Records that provide income, racial, ethnic, gender, and disability status data on program
      applicants and participants;
   2. Unit inspection reports;
   3. Lead-based paint records as required by part 35, subpart B of this title.
   4. Records to document the basis for housing authority determination those rental payments
      are reasonable (initially and during the term of a housing assistance payments contract).

Federal regulations 24 CFR [Code of Federal Regulations] 982.207, “Verification of Selection
Method for Selecting Applicants from a Preference Category,” require a clear audit trail that can
be used to verify that each applicant has been selected in accordance with the method specified
in the administrative plan.

Federal regulations 24 CFR [Code of Federal Regulations] 982.305, “Public Housing Authority
Approval of Assisted Tenancy Program Requirements,” state the Authority may not give



                                                41
approval for the family of assisted tenancy or execute a housing assistance payments contract
until the Authority has determined that the following program requirements have been met

   •   The unit has been inspected by the Authority and passes housing quality standards; and
   •   The rent to owner is reasonable.

Federal regulations 24 CFR [Code of Federal Regulations] 982.308, “Lease and Tenancy,” state
the tenant and the owner must enter a written lease for the unit. The owner and the tenant must
execute the lease.

The Authority’s Section 8 administrative plan, section 2.1, “Gary Housing Authority
Responsibilities,” states the Authority will comply with the consolidated annual consolidated
contract, the application, HUD regulations and other requirements, and the Authority’s Section 8
administrative plan.

In administering the program, the Authority will

   •   Receive applications from families, determine eligibility, maintain the waiting list, select
       applicants, issue a voucher to each selected family;
   •   Determine who can live in the assisted unit at admission and during the family’s
       participation in the program;
   •   Obtain and verify evidence of citizenship and eligible immigration status in accordance
       with 24 CFR [Code of Federal Regulations] 5;
   •   Determine the maximum rent to the owner and whether the rent is reasonable;
   •   Examine family income, size and composition at admission and during the family's
       participation in the program (the examination includes verification of income and other
       family information); and
   •   Establish and adjust the Authority’s utility allowance.

Section 3.0, “Eligibility for Admission,” states that to be eligible for admission to and continued
participation in the Section 8 program, an applicant must be at least 18 years of age and a
resident of the city of Gary or surrounding communities (10-mile radius). Priority will be given
to those applicants who live within the city limits. An applicant must qualify as a family, have
an income within the income limits, meet citizenship/eligible immigrant criteria, provide
documentation of Social Security numbers, and sign consent authorization documents. In
addition to the eligibility criteria, families must also meet the Authority’s screening criteria to be
admitted to the Section 8 program.

Section 3.2, “Eligibility Criteria,” states family status is a family with or without children. Such
a family is defined as a group of people related by blood, marriage, adoption or affinity that live
together in a stable family relationship. To be eligible, each member of the family must be a
citizen, national, or a noncitizen who has eligible immigration status under one of the categories
set forth in section 214 of the Housing and Community Development Act of 1980 (see 42 United
States Code 1436a(a)).

Section 6.5, “Approval to Lease a Unit,” states the Authority will approve a lease if the rent to
owner is reasonable.


                                                  42
Section 10.3, “Verification of Citizenship or Eligible Noncitizen Status,” requires that the
citizenship/eligible noncitizen status of each family member regardless of age be determined.
Before being admitted or at the first reexamination, all citizens and nationals will be required to
sign a declaration under penalty of perjury (they will be required to show proof of their status by
such means as Social Security card, birth certificate, military identification, or military
Department of Defense 214 form).

Section 11.2, “Rent Reasonableness,” states the Authority will not approve initial rent or a rent
increase in any of the tenant-based programs without determining that the rent amount is
reasonable. Reasonableness is determined before to the initial lease and at the following times

   •   Before any increase in rent to owner is approved,
   •   If 60 days before the contract anniversary date there is a 5 percent decrease in the
       published fair market rent report as compared to the previous report, and
   •   If the Authority or HUD directs that reasonableness be redetermined.

The Housing Choice Voucher Program Guidebook, Chapter 9, “Rent Reasonableness,” states in
each case in which the housing authority is required to determine rent reasonableness, it must
document its decision and the basis for it (for example, information on comparable unassisted
units) in the tenants file. This documentation should identify who conducted the rent
reasonableness determination and when.

Finding 5
Federal regulations 24 CFR [Code of Federal Regulations] 982.404, “Maintenance: Owner and
Family Responsibility,” state the Authority must not make any housing assistance payments for a
dwelling that fails to meet housing quality standards, unless the owner corrects the defect within
the period specified by the Authority and the Authority verifies the correction.

Finding 6
Office of Management and Budget Circular A-87, C-2, “Reasonable Costs,” states a cost is
reasonable if in its nature and amount, it does not exceed that which would be incurred by a
prudent person under the circumstances prevailing at the time the decision was made to incur the
cost. The question of reasonableness is particularly important when governmental units or
components are predominately federally funded. In determining reasonableness of a given cost,
consideration shall be given to

   •   Whether the cost is of a type generally recognized as ordinary and necessary for the
       operation of the governmental unit or the performance of the federal award;
   •   The restraints or requirements imposed by such factors as sound business practices,
       federal, state, and other laws and regulations; and terms and conditions of the federal
       award;
   •   Whether the individuals concerned acted with prudence in the circumstances considering
       their responsibilities to the governmental unit, its employees, the public at large, and the
       federal government; and


                                                43
   •   Significant deviations from the established practices of the governmental unit that may
       unjustifiably increase the federal award’s cost.

Finding 7
Federal regulations 24 CFR [Code of Federal Regulations] 960.255, “Self-Sufficiency
Incentives, Disallowance of Increase in Annual Income,” define disallowance as an exclusion
from annual income and a qualified family is a family residing in public housing.

Finding 8
Federal regulations 24 CFR [Code of Federal Regulations] 982.151, “Annual Contributions
Contract,” state an annual contributions contract is a written contract between HUD and a
housing authority. The housing authority agrees to administer the program in accordance with
HUD regulations and requirements.

Federal regulations 24 CFR [Code of Federal Regulations] 982.152, “Administrative Fee,” state
HUD may approve administrative fees to the housing authority for any of the following
purposes:

   •   Ongoing administrative fee,
   •   Costs to help families who experience difficulty finding or renting appropriate housing
       under the program,
   •   The following types of extraordinary costs approved by HUD

           1. Costs to cover necessary additional expenses incurred by the Authority to provide
              reasonable accommodation for persons with disabilities in accordance with part 8
              of this title (for example, additional counseling costs), when the Authority is
              unable to cover such additional expenses from ongoing administrative fee income
              or from the administrative fee reserve,
           2. Costs of audit by an independent public accountant, or
           3. Other extraordinary costs determined necessary by HUD Headquarters, and

   •   Preliminary fee - Costs to coordinate supportive services for families participating in the
       family self-sufficiency program.

Office of Management and Budget Circular A-87, attachment A, “Policy Guides,” states the
application of these principles is based on the fundamental premises that

   1. Governmental units are responsible for the efficient and effective administration of
      federal awards through the application of sound management practices; and
   2. Governmental units assume responsibility for administering federal funds in a manner
      consistent with underlying agreements, program objectives, and the terms and conditions
      of the federal award.

The basic guidelines state factors affecting the allowability of costs. To be allowable under
federal awards, costs must meet the following general criteria:


                                                44
   1. Be necessary and reasonable for proper and efficient performance and administration of
      federal awards;
   2. Conform to any limitations or exclusions set forth in these principles, federal laws, terms
      and conditions of the federal award, or other governing regulations as to types or amounts
      of cost items; and
   3. Be consistent with policies, regulations, and procedures that apply uniformly to both
      federal awards and other activities of the governmental unit.

Attachment B, “Selected Items of Cost,” states costs of entertainment, including amusement,
diversion, and social activities and any costs directly associated with such costs (such as tickets
to shows or sports events, meals, lodging, rentals, transportation, and gratuities) are unallowable.




                                                45
        Appendix D

                             RESULTS OF TENANT FILE REVIEWS
                                          Table I
                                        January 2003 through December 2004
                                                        Properly signed                                             Housing
                                                            housing                                                assistance
                                                           assistance                                              payments
                            Certification     Social       payments                     Lead-                       amount
 Tenant      Birth       claiming to be U.S. Security    contract/lease    Original     based        Rent      ineligible in 2003
 number   certificates        citizens       numbers       agreement      application   paint   reasonableness     and 2004
16065                                                                                                 X                $11,501
16243                                                         X                                       X                  11,787
19605          X                                                                                      X                  11,585
13734                                                         X               X                       X                  12,718
1846                                                                                     X            X                   5,472
13394                                                         X                          X            X                  13,356
15782                                                                                    X                                6,616
13854                                                                                                 X                  18,025
7227           X                X                             X                                       X                   7,919
17325                                                                                                 X                   6,131
17208                                                                                    X            X                   5,608
364                             X                                                        X                                5,198
3085           X                X               X             X               X          X            X                  13,988
13476                                                                                    X            X                  15,244
17749                                                                                                 X                  14,602
6512                                                          X                          X            X                   7,412
9154           X                                X                             X                       X                  16,608
5943           X                X                             X                          X            X                  14,117
2894           X                X               X             X                          X            X                  12,770
1124                            X                             X                          X            X                  13,255
13648                                                         X                                                           8,156
17635                                                                                                 X                  10,989
17536                                                         X                                       X                  11,187
17554                                                                                    X            X                  11,409
6105           X                                              X                          X            X                   9,852
7713                            X               X                                        X            X                  18,312
6470           X                                X                                        X            X                  13,007
13825                                                         X                                       X                  13,122
6288           X                X               X             X                                       X                   8,696
17983                                                                                    X            X                  15,914




                                                               46
                                                         Properly signed                                             Housing
                                                             housing                                                assistance
                                                            assistance                                              payments
                             Certification     Social       payments                     Lead-                       amount
 Tenant       Birth       claiming to be U.S. Security    contract/lease    Original     based        Rent      ineligible in 2003
 number    certificates        citizens       numbers       agreement      application   paint   reasonableness     and 2004
5895                             X                             X                          X            X                   3,853
790             X                                              X               X          X            X                  12,260
6195            X                X                             X                                       X                  11,822
1360            X                X               X             X                                       X                   9,016
12775                                                                                     X            X                  16,510
15562                            X                             X                          X            X                  11,564
205                                                                                                    X                  15,717
436                                                            X               X                       X                  11,310
12179                                                                                                  X                  10,060
7161            X                X               X             X                          X                               16,608
2529            X                                              X                                       X                  14,793
6001            X                X               X             X                          X            X                  10,800
18315                            X                             X               X                       X                  13,512
18971           X                                              X                          X            X                   8,541
6061                                                           X                                       X                  16,098
1626                                                           X               X                       X                  15,440
17211                                                          X                                       X                   7,816
17993                                                                                     X                                6,282
18079                                                          X                                       X                  14,836
1768                                                                                                   X                  10,883
15255           X                                                                         X                               12,021
2563                                                           X                          X            X                  10,502
3756            X                                                                                      X                   3,524
7886                                                           X                          X            X                   4,790
1621                                                                                      X            X                   8,205
4655                             X                                             X                                          10,715
7521                                                           X                                       X                   9,904
3219                                                           X               X                                          18,336
17171                                                                                                  X                  12,504
5780                             X                             X                                                           8,616
361                              X                             X                                                           9,864
18126                                                          X                          X                               12,076
16267                                                          X                                       X                  12,404
12929                                                          X                                                           9,936
19103                                                                          X          X            X                  13,034
Totals         18                18              9             38              10         30           53
                                                                                                                  $738,708

        Note: “X” represents missing or incomplete documentation.




                                                                47
                     Table II

         Housing assistance payment errors
Tenant
number    Certifications   Overpayments   Underpayments
 16065          1                               $5
 19056          1                             $250
 20375          1                              $65
 20455          1                             $116
 13734          2               $627
  1846          1                               $9
 15782          2               $130           $20
 13854          2                              $90
  7227          2               $198
 17325          2                $19
 18017          1                              $22
  1057          2                 $36           $9
 17208          2                $105
   364          2               $2,071
  3085          2                             $19
 13476          2                            $1,093
 17749          2               $181
  6512          2               $817
  9154          2                $28           $25
  5943          1               $221
  2894          1
  1124          2                $98           $72
 13648          1                $60
 17635          2                 $9
 17536          2                              $42
 17554          2                $384
  6105          2                 $36          $22
  7713          2                 $63
 17702          1               $1,890
  6470          2                $976
 13825          1                $232
  6288          2               $4,647
 17983          2               $3,136
  5895          2                $200
   790          1                             $325
  6195          2               $1,086
  1360          2                            $1,426




                           48
Housing assistance payment errors (continued)
Tenant
number    Certifications   Overpayments   Underpayments
 12775          2              $280
 15562          2              $113
   205          2                              $27
   436          2                 $1
 12179          2                $493
  7161          2                             $650
  2529          2                             $891
  6001          2                $660
 18315          2               $1,038
 18971          2                 $12          $28
  6061          2                $312
  1626          2                 $48
 17211          2                $639
 17993          2                              $44
 18079          2                              $30
  1768          2                              $66
 15255          2                 $60
 15579          2                $171
  2563          2                 $15         $544
  2846          2                               $9
  3756          2                              $30
  7886          2                $609
  1621          2                $221          $18
  4655          2                $352
  7521          2                $132
  3219          2                $156
 17171          2                             $105
  5780          1                             $132
   361          2                $378
 18126          1
 16267          2                $128
 12929          2
 19103          2                 $70
 Totals        126              $23,138      $6,184




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